Could price be a tool for encouraging water conservation in Arizona?

Sharon Megdal, director of the University of Arizona’s Water Resources Research Center, said household water use is inelastic up to a point but that higher prices can discourage use for things such as outdoor watering. (Cronkite News Service Photo by Adam Waltz)

TUCSON – It’s a complex calculation, but at the most fundamental level this much is true: The amount of water needed to have a lush, green lawn in Phoenix would yield a substantially higher water bill for a homeowner here.

To Dan Hunting, a senior policy analyst for Arizona State University’s Morrison Institute for Public Policy, it’s no surprise then that so many Tucson homes don’t have lawns.

“It’s basic economics,” he said. “Price goes up and use goes down.”

The owner of a typical single-family home here using 7,480 gallons in a month would pay Tucson Water $28.08. Depending on the season, a homeowner in Phoenix would pay the city between $8.16 and $21.64 per month for a like amount.

At the same time, the average Phoenix resident used 123 gallons of water per day in 2010, 20.6 percent more than Tucson’s daily average of 102 gallons per person, according to the Western Resources Water Meter Report prepared by the Boulder, Colo.-based conservation group Western Resource Advocates.

As leaders ponder the long-term future of Arizona’s water supply, Hunting and others say that raising water prices, balanced against the fact that people must have water to survive, is an option for encouraging conservation and helping people better appreciate the true value of water.

“Water is heavily subsidized and way too cheap,” said Sandy Bahr, director of the Sierra Club’s Grand Canyon Chapter. “Because of that it is not valued.”

Sharon Megdal, director of the University of Arizona’s Water Resources Research Center, said household water use is inelastic up to a point but that higher prices can discourage use for things such as outdoor watering.

“People do respond to price increases,” she said.

David White, co-director of Arizona State University’s Decision Center for a Desert City, said that while there is a civic responsibility to provide the water people need to live misleadingly low bills can create a false sense of security among consumers.

“It creates a sense of abundance, a sense that there is no concern over conserving water,” he said.

Jim Holway, director of Western Lands and Communities, a joint venture of the Lincoln Institute of Land Policy and Sonoran Institute, said that while some people are conserving water for environmental reasons the cost of water is low enough that economic reasons don’t come into play for most.

“It’s not a rational economic decision because water’s cheap,” he said.

Pricing water

In general, local governments and utilities price water according to the cost it takes to treat it and build and maintain the infrastructure necessary to transport it. Most water departments and water utilities run as enterprise funds that are required to recover only the costs they incur.

Scottsdale’s Water Resources Department spends eight months of the year determining rates by anticipating the costs of capital improvements and rehabilitation projects. A proposal is then offered to the City Council. For a private utility, this review and approval comes from the Arizona Corporation Commission.

“Politics plays a role in the process,” said Annie DeChance, public participation and outreach manager for the city of Scottsdale’s Water Resources Department.

Helen Parker, financial analyst for the city of Chandler, said that city’s Municipal Utilities Department must look at needs up to 10 out to determine the appropriate rate model.

“It’s really based on what we think our future costs are going to be,” she said.

Fernando Molina, public information officer for Tucson Water, said it’s important to balance recovering costs while maintaining affordability for the consumer.

“It has to be affordable, and it needs to be sustainable,” he said.

To balance these necessities, many cities have adopted a block pricing structure, which charges lighter water users, consuming what they need to live and maintain their homes, at a lower rate while charging heavier water users higher rates beyond a base tier.

According to DeChance, Scottsdale’s blocked pricing structure is the fairest way to charge.

“It’s structured to reward the people who use less water,” she said.

Tucson has one of the most steeply blocked pricing structures in the state. The owner of a single-family home will pay $1.29 per 100 cubic feet of water – 748 gallons – up to a level Tucson Water says covers the usage of most households. The highest of the four pricing blocks is $11.04 per 100 cubic feet for the heaviest water users.

Phoenix doesn’t use block pricing but adjusts rates according to the time of year, anticipating that seasonal changes will cause homeowners to use less water and in turn allow the city to spend less money producing water.

Water bills in both cities vary based on water meter size and some other usage-based fees – an environmental charge in Phoenix and Central Arizona Project and conservation charges in Tucson. But a bill of $28.08 per month for a Tucson homeowner whose usage is within the first block of pricing would range between $4.36 and $19.36 per month in Phoenix, depending on the time of year.

Water costs in Phoenix are eighth-lowest on a list of 30 U.S. cities, according to Circle of Blue, an organization dedicated to covering world resource issues.

Kathryn Sorensen, director of the Phoenix Water Services Department, said water is priced to reflect its necessity.

“It’s a vital commodity sold at a very reasonable price,” she said.

ASU’s White said he supports pricing water appropriately to match the needs of different customers to ensure that people are able to afford the water they need to survive.

“That first block should be very, very inexpensive,” he said.

However, White said that water is still undervalued – making people undervalue conservation as a result – because rates don’t take into account price supports for agriculture and federal investments in infrastructure.

“Ideally water would be priced according to what it really costs,” he said.

Price and usage

Robert Medler, vice president of government relations for the Tucson Metro Chamber, said price can be an important way to communicate the value of water and promote conservation.

“I think there’s room for people to pay more for water,” he said.

However, he and others noted that raising water rates to do so could actually lead to even higher rates. The reason: Reduced usage could force companies to raise rates to cover their costs, reducing usage even further and forcing even higher rates.

Medler said Tucson’s experience with conservation efforts hints at this.

“Their customer base uses less and less water, pretty much every year now for almost a decade. So they keep having to raise the rates,” he said. “Well you raise the rates, people use a little less water.

“I mean, it’s kind of gotten to the point where they’ve almost got a problem,” he added. “People aren’t using enough water for the cost of running the system.”

White said such a phenomenon can lead to what he calls a “death spiral.”

“That can lead to bankruptcy,” he said.

Hunting of ASU’s Morrison Institute said he’s skeptical that such a scenario could happen in Arizona. Anticipated population growth would help keep rates down even if per-capita usage declines, he said.

Grady Gammage Jr., a senior research fellow at the Morrison Institute, senior sustainability scholar at ASU’s Global Institute of Sustainability and former president of the Central Arizona Project Board, said raising the price of water can have only so much of an impact.

“No amount of changing the price will change that because you have to drink it,” he said.

The UA’s Megdal said raising rates while keeping in mind people’s basic need for water could produce revenue that can fund long-term needs such as renovating and expanding systems.

“Maybe we should look at charging higher prices for water, using pricing as a discouragement for use and then use those funds that are coming in because of the higher price to create some kind of long-term investment pool or bank for infrastructure over the long-term,” she said.

The future

Whether or not price is used to encourage conservation, water is likely to become more expensive over the long term as Arizona seeks new sources amid population growth.

Megdal said prices will only increase because the demand for water is expected to eventually exceed current supplies.

“We’re growing into our supplies and looking at more expensive, incremental sources for additional supplies,” she said.

The Arizona Department of Water Resources said as much earlier this year when it released a report saying that Arizona will need to develop additional water supplies over the next 25 to 100 years to keep pace with growth.

The gap between water supply and water needs might be bridged with desalinating ocean or brackish water, cloud-seeding and treating reclaimed water to potable quality, among other possible sources. It’s not yet clear how the costs of any of those would be passed along to consumers.

Jeff Tannler, statewide active management area director at the Arizona Department of Water Resources, said the department is already exploring options, such as desalination, to augment Arizona’s water supply.

“It may not be on the immediate horizon, but we believe it’s important to start talking about them now,” he said.

These options would help fill a gap between water supply and demand that Tannler said may not be possible to address through conservation alone.

“Conservation certainly helps, but there may be a limit,” he said.

Michael J. Lacey, director of the Arizona Department of Water Resources, said in order to bridge an anticipated gap in water supply Arizona will need to start making plans that will manifest in the next 30 to 40 years.